Market Review 10/2020

US presidential elections were (are) not only entertaining but also raised a few interesting points. First, “predominant opinion” held by respected (or “respected”, depends on personal preferences) experts, mainstream media and major pollsters, turned out to be very far from reality. The Economist, for example, estimated the likelihood of Biden winning the elections at 90%+, which undoubtedly places the actual results outside any sensible margin of error. Second, trying to explain and interpret market behavior before, during and after the Election Day was as useless as following the news.

Definitely Maybe

Joe Biden, the believed leader (again, according to polls and the opinion of experts) of the presidential race, was not considered by the market as a “good candidate” back in September, but several weeks passed, and he became the “obvious” reason for the growth in indices – apparently due to the higher likelihood of further government aid. Of course, this reasoning looked very far-fetched – before that, for example, the market was afraid of higher taxes and Blue Wave’s “threat to capitalism”. On Election Day, strong fluctuations in the futures market were explained by uncertainty (although it is not clear how it ever helped the markets) of the outcome of the elections, or by the composition of the government. This leads to the third point – the players, it seems, still cannot decide which of the candidates is preferable for the country’s economy and financial markets. It is hard to say how long it will take them to formulate the opinion.

There is also a fourth, sad point, related to the lack of understanding of the real situation (or unwillingness to admit it, or maybe outright bias) by many authoritative sources, but this discussion is beyond the scope of this review, so let us instead turn to the events of last month.

European and US equity markets

Volatile October

In October, volatility reigned on the global stock markets, and the month ended with a decline. Futures on the S&P 500 index lost 3.3%, while the European Dax fell 10%. Of course, the turmoil around the US elections added chaos and was playing with the mood of market participants. European platforms, in addition, have obviously suffered from the second wave of Covid virus and the decision of the authorities of many countries to go into various forms of lock-down. If the situation with the second wave of pandemic does not improve (and this seems to be becoming a truth, not an assumption) and the American market decides it is not happy with the next president, the European markets will face very difficult weeks.

Benchmark 10-year bond yields

Sentiment worsens in Europe

Surveys showed that sentiment in services industry, the Eurozone’s biggest sector, fell to -11.8 in October and consumer sentiment fell to -15.5. Area’s economic activity slipped back into decline in October as second wave of the coronavirus swept across the continent – IHS Markit’s Flash Composite Purchasing Managers’ Index, seen as a good gauge of economic health, fell to 49.4 from September’s final reading of 50.4. It was dragged down by the service industry’s PMI, which sank more than expected to in October. The German economy grew by a record 8.2% in the third quarter as higher consumer spending and exports helped Europe’s largest economy to recover. This jump followed an unprecedented plunge of nearly 10% in the second quarter, when household spending, company investments and trade collapsed. With new lockdown measures taking place across Europe, it seems that this recovery will prove to be short-lived.

US grows on government aid

U.S. economy grew at a historic pace in the third quarter (the Commerce Department reported annualized growth of 33.1%) as the government injected more than $3 trillion worth of pandemic relief, fueling consumer spending. The rebound in gross domestic product followed a 31.4% rate of contraction in the second quarter, the deepest since the government started keeping records in 1947. U.S. consumer confidence fell in October as the boost from fiscal stimulus fades – consumer confidence index slipped to a reading of 100.9 in October from 101.3 in September, while US business activity increased to a 20-month high in October.

High Yield bond Indexes

China steady in October

China’s economic recovery showed mixed signals while remaining broadly steady in October. Manufacturing and non-manufacturing PMIs were 51.4 and 56.2 respectively; with composite PMI, at 55.3 in October, barely moving. Positive data for new export orders is a good indication that the trade figures will also be strong. Chinese growth data for the third quarter showed a continuing economic recovery – GDP grew by 4.9% year-on-year, larger than the second quarter’s 3.2% growth.

EU and US yields take different paths

Last month we have witnessed a divergence between the US and EU government bond markets. The Federal Reserve has been taking a step back from the markets pushing for more fiscal stimulus from the government to help the Covid-crippled economy. However, the US federal government had its sights set on the presidential elections thus making any deal between the two parties almost impossible. Meanwhile German yields had been steadily declining and putting some tailwind to the EUR credit markets.

High yield spreads had also seen a bit of volatility, nevertheless the spreads managed to close the month flat. The Bloomberg Barclays high yield bond indices for Europe and the US managed to show gains in October, with Europe rising by 0.34%, and the US 0.5%.

Dollar index still not surrendering

Dollar index is balancing right on the ten-year-old trend line and is still making us a bit nervous. It has all reasons to dip below 89 mark (and still go higher eventually) but is yet to do so. Periods of elections tend to be very volatile and probably it is wise to wait for the dust to settle down before finally positioning oneself with some degree of confidence. Similar situation can be found in precious metals.

Gold price, USD/oz

Latest rally

With European trading venues opening on November 4, the stock market decided to rally along with the increasing probability of Joe Biden’s victory. The next few days after the elections will show whether this rally is “real”. Until then we do not want to rush to conclusions and aggressively add risk. Even if the lows of mid-September and late October are indeed all the correction the stock market was capable of, some pause in the coming days is more than likely. Let us watch how the market will hold its positions near the S&P 500 3350-3400 region and start from there.